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Strong dollar, Fed rate hike expectations weigh on metals prices

A strengthening U.S. dollar and firming expectations that the Federal Reserve will hike interest rates at its Dec. 12-13 meeting weighed heavily on metals prices last week.

With few exceptions, prices across the board finished the week in the red despite a late-week boost for copper and iron ore following strong Chinese import data for November.

In the U.S., the November nonfarm payrolls report showed the economy has continued to create jobs, while other economic indicators during the week were less positive.

There was also progress on the tax plan front, and an agreement on a temporary funding bill that averted a government shutdown late Dec. 7 eased investor sentiment.

Meanwhile, Bitcoin rose as much as 70% last week, exceeding the US$17,000 mark before plummeting to US$15,600. Market observers increasingly believe that the rally of the cryptocurrency, alongside a strong dollar and the nearing rate hike, is among the key reasons gold continues to be under pressure.

Price ring

Metals across the board booked losses last week.

Iron ore fell 2.5% to US$67.0/t, now trading more than 17% below levels 12 months ago.

Base metals saw even steeper drops, with zinc falling as much as 5.1% to US$3,101/t, copper pulling back by 4.1% to US$6,530/t and aluminum and nickel both falling over 2%. Aluminum finished the week at US$1,994/t, and nickel closed at US$10,987/t.

Precious metals also shifted lower. At US$15.8/oz, silver ended the week with a loss of nearly 4%, while gold dropped 2.5% to US$1,248/oz.

Talking points

The recent slump in silver prices provides a buying opportunity for investors as the metal is set to climb again to US$20/oz in 2018, according to new research by Macquarie.

"Unless something dramatic happens in the next few weeks, 2017 will go down as one of the most boring years in silver's history," the bank's analyst team said Dec. 6.

At about US$17.12/oz year-to-date, silver has averaged nearly flat on 2016 levels, with a trading range of just US$3.35/oz, the lowest since 2005.

Macquarie linked the lackluster price performance mainly to weak investor demand, which plummeted by an estimated 37% year over year. In particular, a major turnaround in the U.S. coin market was seen as a significant driver for the price slump.

Silver Eagle coin sales in 2016 were strong at 37 million ounces but hit their lowest annual total since 2007 at less than 20 million ounces in 2017 as investor fears of financial collapse or inflation from quantitative easing policies receded.

"Silver has also suffered in comparison to buoyant equity markets, and ... one has to assume Bitcoin and other crypto-currencies have attracted some money that would otherwise have been put into silver," the team added. "We think a repeat of this year's confluence of silver-negative events is unlikely. U.S. coin sales can't fall by as much as they did this year, while both equity markets and Bitcoin will struggle to maintain their recent stellar pace of growth."

In line with this view, Macquarie expects silver to rally to about US$19/oz in the first half of 2018, based on a gold/silver ratio of 65 and the assumption that base metals prices will slightly weaken.

"We expect gold to move higher in 2018 on elevated U.S. and geopolitical risks, and our macro-teams' forecasts of a much weaker dollar later in H2 2018. This should provide the second-leg of the silver rally," the team added.

For 2018 as a whole, the bank forecasts an average silver price of US$20/oz.

Financings

Last week saw a significant number of sizable financing deals coming to the market.

Alphamin Resources Corp. launched two separate private placements to raise up to C$71.4 million for developing its 80.75%-owned Bisie tin project in the Democratic Republic of the Congo. If successful upon closing Jan. 8, 2018, the deals will complete Bisie's peak funding requirements of US$172.1 million.

Cobalt 27 Capital Corp. agreed to an C$85 million bought-deal offering with a syndicate of underwriters. Proceeds are earmarked for the purchase of up to 720 tonnes of physical cobalt now under option for a total purchase price of about US$58 million.

Harmony Gold Mining Co. Ltd. seeks to raise US$100 million via a private share placement or a rights issue to refinance part of the bridging finance for the acquisition of the Moab Khotsong gold-uranium mine in South Africa.

Hochschild Mining Plc plans to redeem all of its outstanding 7.750% bonds due 2021, totaling US$294.8 million, in a bid to reduce interest payments.

Cleveland-Cliffs Inc. launched and priced separate offerings of US$400 million of its senior secured notes due 2024 and up to US$316.3 million of its convertible senior notes due 2025. Proceeds will be used to finance a substantial portion of its hot briquetted iron capital project in Ohio.

In a bid to reduce debt, Aluminum Corp. of China Ltd. undertook a 12.6 billion Chinese yuan debt-for-equity swap at four of its business units. Eight investors participated in the deal.

ArcelorMittal closed the issuance of €500 million of 0.95% fixed-rate notes due Jan. 17, 2023, under its €10 billion Euro medium-term notes program. The proceeds will be used for general corporate purposes, including refinancing existing debt.